ONS: Rise in business investment and consumer spending is helping growth, with GDP rise confirmed at 0.8%

The UK economy continued to advance in the first quarter of this year, helped by growth in all sectors as well as an increase in business investment and households spending, official figures have showed.

The Office for National Statistics confirmed its estimates of GDP growth of 0.8 per cent in the first quarter of this year and of 3.1 per cent compared to last year, the latter marking the best annual growth rate since the last quarter of 2007.

All sectors contributed to economic growth, led by the dominant services sector - which makes up three quarters of UK output – where it was recorded growth of 0.9 per cent.

UK economy: The ONS confirmed its estimates of GDP growth of 0.8 per cent in the first quarter

Meanwhile, on the expenditure side, businesses increased their investments for the fifth successive quarter, growing by 2.7 per cent and contributing 0.2 per cent to the economy.

Higher employment, revived consumer confidence and improved purchasing power saw consumer spending rise by 0.8 per cent, picking up speed from the end of last year, the ONS said.

The UK economy has been struggling to return to its previous levels of activity since it plunged into recession six years ago.

But the overall size of the economy in the first quarter was just 0.6 per cent below the level where it last peaked in early 2008, meaning it looks likely to return to this level during the current quarter.

Dominant: All sectors contributed to economic growth, led by the services sector

Howard Archer, chief economist at IHS Global Insight, said: ‘With latest data and surveys pointing to ongoing robust activity, it is odds-on that the economy is finally surpassing the first quarter 2008 peak level in the current quarter. It’s been a long time coming but hopefully the economy can now sustain decent growth for an extended period.’

David Kern, chief economist at the British Chambers of Commerce, said that, while he expected growth figures to remain unrevised, it was encouraging to see a rise in business investment which was likely to boost business confidence further.

He said: ‘It is pleasing to see strong growth in business investment for the second consecutive quarter, and a welcome improvement in the trade balance.

‘It is a shame however that exports declined in the quarter and the improvement in the trade balance was the result of an even bigger fall in imports.’

Growing confidence: Consumer spending picked up speed from last year and rose by 0.8 per cent

Net trade had no impact on growth, after adding 1 per cent to GDP in the last quarter of 2013, the ONS said.

Mr Kern added: ‘Some rebalancing towards investment and exports is taking place, but the pace is inadequate and efforts in these areas must be strengthened.’

Industrial output was up 0.7 per cent underpinned by manufacturing, while construction grew by 0.6 per cent, with performance limited by the bad weather and flooding in February.

Figures published today by the CBI in its monthly Industrial Trends Survey echoed official figures. The CBI said manufacturers' orders were flat in May, after a slight fall last month, while hopes for the next three months remained strong.

'Overall, the manufacturing sector
continues to perform well. Output growth is on an upward trend, with
firms expecting an even stronger rise in the next three months,' said
Katja Hall, deputy director general at the CBI.

Exports, however, continued to fall, with with 19 per cent of firms
saying their export order books were above normal and 28 per cent saying
they were below normal, giving a negative balance of 9, down from a
negative balance of 3 in April.

'The recent rise in sterling, coupled with a tepid recovery in the euro
zone could weigh on export demand,' said Ms Hall.

With the economy showing continued strength, expectations are mounting that the Bank of England could start to rise interest rates early on in 2015, and perhaps even before the end of this year.

Expectations: The Bank of England could rise interest rates earlier than predicted as the economy continues to recover

The Bank of England's Policy Monetary Committee voted unanimously to keep interest rates at their historic low of 0.5 per cent at the start of the month, but minutes released yesterday showed that ‘for some members the decision was becoming more balanced’ - suggesting central bank ‘hawks’ will start voting for an increase in the coming months.

Officials also argued that rates may need to rise early for the Bank to fulfil its promise of ‘gradual’ and ‘limited’ increases.
‘It could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start,’ the meeting minutes said.

Mr Archer said: ‘For the time being, we retain the view that interest rates are most likely to start edging up in the second quarter of 2015, but there is undeniably a very real and growing likelihood that the Bank of England will act before then.

‘We suspect that a majority of MPC members will be willing to err on the side of caution in raising interest rates so as to give the economy every chance to develop more balanced, sustainable growth with business investment seeing extended improvement and exports increasingly kicking in.’

In contrast to confirmation of robust GDP growth in the first quarter, public finance figures for the month of April provided disappointing news for the Chancellor George Osborne, as public sector net borrowing soared to a much larger-than-expected £11.5billion from £9.5billion in April 2013.

Mr Archer said:‘The disappointing public finance data for April are likely to reinforce the credit rating agency’s caution about upgrading the UK’s sovereign credit rating.’

Meanwhile, the ONS figures confirmed that the Chancellor just met the downwardly revised target for last year contained in March’s budget, with deficit falling to £107.4billion from a previously reported £107.7billion.

‘Nevertheless, a deficit of £107.4billion in 2013/14 highlighted the fact that here is still an awfully long way to go in getting the public finances into decent shape,’ said Mr Archer.